For Clients, Advisors and Community.
If you or your parents have an IRA with six figures or more, you need to
read this article carefully.
A word of introduction: An “inherited IRA” is an account originally
established by Mom or Dad and at the death of Mom or Dad is held for the
benefit of son or daughter or grandchild (or other relative). It is typically
titled, “Mom or Dad IRA for the benefit of Son or Daughter”.
The amount of protection may vary from state to state while the owner
of the IRA is alive and it is in his or her name. However, Federal bankruptcy
law generally provides some basic protection against creditors and predators.
For a long time, there has been a question whether an inherited IRA was
also protected from creditors.
In January 2011, I reported in this blog a Texas case where the court held
an inherited IRA was, just like more IRAs and retirement plans, protected
against creditor claims.
In June 2013, I reported a case from the Seventh Circuit Appellate Court
(the court whose decisions are the law in Northern Illinois and environs)
where the court held inherited IRAs were NOT protected from creditor claims.
Here, in brief, Heidi Heffron-Clark inherited a $300,000 IRA and later
filed bankruptcy. She wanted to keep the IRA. She claimed the inherited
IRA was exempt from the claims of creditors. The court ruled against her.
The decision was appealed to the Supreme Court of the United States.
In June 2014, the Supreme Court, in a unanimous decision upheld the Seventh
Circuit, holding inherited IRAs are not protected from creditor claims.
This is a ruling that has immense impact for us today.
So, a retirement plan account or IRA in the hands of Mom or Dad is protected
from creditors. But, that same account once inherited is not protected.
Is there a way to make sure that an inherited IRA remains protected against
The answer is
yes. The interest of a beneficiary in a trust created by a third party (with
certain provisions) can be exempt from the attack of creditors. Naming
a special retirement trust as beneficiary of the IRA proceeds will restore
Individuals with an IRA account of six figures or more should reconsider
the beneficiary structure and should consider a trust based beneficiary
arrangement for the next generation. This will limit the risk of creditor attack.
There are more than taxes to consider when planning for your retirement.
For most families, a retirement plan or IRA will be one of the largest
assets. With proper planning, it can provide a legacy for multiple generations.
This requires thought and consideration at the planning stage. When reviewing
your estate plan, you should consider the potential benefits of a special
retirement trust to proect your family.